Case Law Details
Anand Mercantile Samaj Seva Trust Vs ITO (ITAT Ahmedabad)
ITAT Ahmedabad held that benefit of exemption under Section 11(1)(a) and 11(2) of the Income Tax Act is not available to “deemed income” under Section 11(3) of the Income Tax Act
Facts- During the course of assessment, the Assessing Officer observed that the assessee had claimed exemption under Section 1 1(1)(a) and Section 11(2) of the Act on “deemed income” under Section 11(3) of the Act as well. Accordingly, the Assessing Officer restricted the claim of the assessee under Section 11(2) of the Act to Rs. 73,89,082/-.
The issue for consideration here is whether “deemed income” under Section 11(3) of the Act is eligible for exemption under Section 11(1)(a) and Section 11(2) of the Act.
Conclusion- In the case of “deemed income” under Section 11(3) of the Act, where the amount is already spent by assessee for purposes other than charitable purposes, it cannot be said that the assessee accumulated such income with an intention to apply it for rightful purpose. Therefore, in view of the above observations we are of the considered view that “deemed income” under Section 11(3) of the Act is not eligible for claim of exemption under Section 11(1)(a) and Section 11(2) of the Act.
Section 11 extends benefit of exemption to only “incomes derived from property held under Trust”, and “deemed” income under Section 11(3) (which uses the expression “deemed to be income of such person”) does not, going even by the literary reading of the words, fall under such categorization. Therefore, in our considered view, benefit of exemption under Section 11(1)(a) and 11(2) of the Act is not available to “deemed income” under Section 11(3) of the Act, even as on literary reading of statutory provisions. Accordingly, the A.O. is directed to re-compute the exemption available to the assessee under Section 1 1(1)(a) and Section 11(2) of the Act by excluding “deemed income” under Section 11(3) of the Act.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These two appeals have been filed by the Assessee against the order passed by the Ld. CIT(Appeals), National Faceless Appeal Centre(in short “NFAC”), Delhi in Order No. ITBA/NFAC/S/250/2021-22/1035072583(1) & ITBA/NFAC/S/250/202 1-22/1035072587(1) vide order dated 25.08.2021 passed for Assessment Years 2016-17 & 2017-18.
2. The assessee has taken the following grounds of appeals:-
Assessment Year 2016-1 7
1. The Learned CIT-(A), NFAC erred in law and/or on facts in confirming the action of the AD.
2. The Learned CIT-(A), NFAC erred in law and/or on facts in confirming restriction of claim of accumulation u/s 11(2) to Rs. 7389082.
3. The Learned CIT-(A), NFAC erred in law and/or facts in not considering income chargeable u/s 11(3) as income derived from property held under the trust and brought to tax without any relief which is otherwise available to primary income of the trust.
4. The Learned CIT-(A), NFAC erred in law and/or facts in not considering Ground 2 of appeal and disposing appeal considering Ground 1 as sole ground of appeal. Ground 2 read as under:
Assessing Officer has considered the income of A.M. College of Science and Technology Anand in total income of the trust eventhough credit for TDS 673816 not allowed by Assessing Officer which is unlawful and against the law, allow credit for TDS Rs. 673816.
The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
Assessment Year 201 7-1 8
1. The Learned CIT-(A), NFAC erred in law and/or on facts in confirming the action of the AO.
2. The Learned CIT-(A), NFAC erred in law and/or on facts in confirming restriction of claim u/s 11 to Rs. 26901936.
3. The Learned CIT-(A), NFAC erred in law and/or facts in not considering income chargeable u/s 11(3) as income derived from property held under the trust and brought to tax without any relief which is otherwise available to primary income of the trust.
The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
3. The brief facts of the case are that the assessee is a charitable trust having education as its primary object. The original return of income was filed by the assessee on 15.10.2016 and revised return of income on 16.10.2016 declaring total income of Rs. 1,43,89,080/- and claiming refund of Rs. 23,34,970/-. During the course of assessment, the Assessing Officer observed that the assessee had claimed exemption under Section 1 1(1)(a) and Section 11(2) of the Act on “deemed income” under Section 11(3) of the Act as well. Accordingly, the Assessing Officer restricted the claim of the assessee under Section 11(2) of the Act to Rs. 73,89,082/-. While restricting the claim of the assessee, the Assessing Officer made the following observation:-
“Here in this case, the assessee has gross receipts of Rs.2,52,83,936/-, out of it assessee has applied income for charitable purpose is of Rs.1,41,02,264/- which is 55.775% of gross receipts for the year under consideration. The assessee is also eligible for amount accumulated u/s 11(1)(a) of the Act at the rate of 15% of gross receipts i.e. Rs. 37, 92,590/-. From the above it is clear that after claiming revenue expenditure of Rs.1,41,02,264/- (i.e. 55.78% of gross receipts) and Rs.37,92,590/- (i.e. 15% of gross receipts), assessee is eligible for accumulation of amount u/s. 11(2) of the Act is only for Rs. 73,89,082 i.e. 29.225% (100-15 -55.675) of gross receipts. For getting benefit of exemption u/s. 11(2) & 11(1)(a) of the Act, assessee has to accumulate the amount out of previous year’s gross receipts only. Here, in this case assessee has claimed exemption u/s. 11 (2) of the Act of Rs. 1 ,30,00,000/- showing it as accumulated amount. In actual assessee is not having such amount of the year under consideration on hand for accumulation. Here in this case, after claiming exemption u/s. 11 (2) of the Act of Rs. 1,30,00,000/- assessee has shown total income applied of Rs.3,08,94,854/- and shown net deficit of Rs.56,10,918/- and set off this deficit against income u/s. 11(3) of the Act of Rs.2,00,00,000/-. Assessee has used Rs.56,10,918/- for accumulation u/s. 11 (2) of the Act out of income u/s. 11 (3) of the Act of Rs.2,00,00,000/-.
The income shown by the assessee u/s. 11 (3) of the Act is that income which was set a part in an earlier year for specific purpose of use only. If this amount is not utilized by the assessee for the specific purpose, assessee cannot take advantage for further accumulation. Out of this income u/s.11(3) of the Act assessee cannot claim further exemption either u/s. 11(1 )(a) or u/s.11(2) of the Act. Here in this case, out of the income u/s. 11(3) of the Act of Rs.2,00,00,000/-, assessee has further made accumulation of Rs. 56, 10,918/- which is not allowable.
5.5 Here in this case, assessee has created a notional deficit of Rs. 56,10,918/- and set off the same against income u/s. 11 (3) of the Act which is not is nothing but an attempt to reduce the tax liability on surplus income of the year under consideration. On plain reading of the provisions of Section 11 (2) of the IT Act, it can be seen that the provisions of this section is applicable to those cases where 85% of the income earned/received during the year is not utilized and accordingly assessee has to accumulate u/s. 11 (2) of the Act a surplus amount of Rs. 73,89,082/- only.
After considering the above facts that since the assessee has accumulated excess amount u/s. 11 (2) of the Act, than the surplus amount available for the year under consideration of Rs. 73,89,082/-, assessee has accumulated Rs. 1,30, 00, 000/-using income u/s. 11(3) of the Act which is nothing but the intention to reduce the tax liability out of taxable income u/s.11 (3) of the Act.
In view of the above facts, the claim of exemption u/s. 11 (2) of the Act is allowed to the extent of Rs. 73,89,082/- only instead of Rs. 1,30,00,000/- claimed in the return of income. Penalty proceeding u/s. 271(1)(c) of the Act is also initiated for furnishing inaccurate particulars of income.
7. Subject to the above discussion, income of the assessee trust is computed as under :
Gross total income |
Rs. 2,52,83,936/- | |
Less:
i. amount applied for charitable purpose ii. Allowable exemption u/s. 11(2) of the Act iii. Exemption u/s. 11(1)(a) of the Act Add: Income chargeable u/s 11(3) of the Act. |
Rs. 1,41,02,264/-
Rs. 73,89,082/- Rs. 37,92,590/- |
Rs. 2,52,83,936/-
Rs. 2,00,00,000/- |
Assessed Income | Rs. 2,00,00,000/- |
4. In appeal Ld. CIT(Appeals) upheld the order of the Assessing Office with the following observation:-
“4.13 From the above factual position, it is evident that the appellant after claiming 15% of accumulation u/s.11(1), has further sought additional accumulation u/s.11(2) in excess of the amount available out of 85% of such income derived during the relevant year from property held under trust. From the facts on record, it is evident that the income derived during the relevant previous year from the property held under trust is only Rs.2,69,01,936/- and 85% thereof as available to the appellant was only Rs.2,28,66,646/-. After deducting Rs. 77,95,009/- and Rs. 1,28,000/- being amount actually spent for the specified purpose and on capital expenditure respectively, the balance income derived during the previous year from property held under trust is only Rs.1,49,43,647/-. Therefore, the appellant’s claim for additional accumulation u/s. 11(2) could not have exceeded this sum as evident from the plain language of the Act.”
5. The assessee in appeal before us against the order passed by Ld. CIT(Appeals). The issue for consideration before us whether “deemed income” under Section 11(3) of the Act is eligible for exemption under Section 1 1(1)(a) and Section 11(2) of the Act. Before us, the Counsel for the assessee submitted that on a bare perusal of the Act, apparently there is no such prohibition that “deemed income” under Section 11(3) of the Act shall not be eligible for claim of exemption under Section 1 1(1)(a) and Section 11(2) of the Act. For this proposition, Counsel for the assessee relied upon several judicial precedents including the decision of Natwarlal Chowdhury Charity rendered by Calcutta High Court (189 ITR 656) on this issue. Further, the Counsel for the assessee submitted that wherever the Statute intended that such exemption should not be allowed to the assessee, a specific provision restricting the allowability of exemption has been specifically introduced in the said Statutory provision. In support of his argument, the Counsel for the assessee drew our attention to the provision of Section 115 BBI of the Act wherein the Act itself has included within the definition of specified income, “deemed income” under Section 11(3) of the Act. Accordingly, the Counsel for the assessee submitted that in view of absence of any specific restriction under Section 1 1(1)(a) and 11(2) of the Act restricting the claim of exemption in respect of “deemed income” under Section 11(3) of the Act, the assessee would be eligible to claim the benefit of exemption under Section 11(1)(a) and 11(2) of the Act, in respect of such “deemed income” under Section 11(3) of the Act.
6. In response, the Ld. D.R. placed reliance on the observations made by the Ld. A.O. and Ld. CIT(Appeals) in their respective orders.
7. We have heard rival contentions and perused material on record. The specific issue for consideration before us is whether the assessee is eligible to claim exemption under Section 11(1)(a) and 11(2) of the Act in respect of “deemed income” under Section 11(3) of the Act. We observe that the Rajkot ITAT in the case of Prabhas Patan Jain vs. Income Tax Officer, (2023)149 com 277 (Rajkot – Trib.) has held that exemption under section 11 is not available on “deemed income” and, therefore, assessee was not eligible to claim exemption under section 11(1)(a) and section 11(2) in respect of “deemed income” under section 11(3) of the Act.
The operative part of the decision is reproduced below for ready reference:-
“8. We have heard the rival contentions and perused the material on record. After giving a thoughtful consideration to the facts before us and the issue for consideration, we are unable to accept the contention of the counsel for the assessee, for the following reasons:
8.1 Firstly, in the judicial precedents on which the counsel for the assessee has placed reliance, the Circular No. 29 [F. No. 20/22/69-IT(A-I)], dated 23-8-1969 was not brought to the attention of the Honourable High Court of Calcutta for its consideration. We observe that the language of the Circular is plain and unambiguous, which is being produced below for reference:
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- Attention is invited to the Board’s Circular Nos. 5-P(LXX-6) of 1968 and 12-P(LXX-7) of 1968 [Clarification 2] which had been duly endorsed to all Chambers of Commerce. References are still being received from the public seeking clarifications regarding the taxability of income under the provisions of sections 11(1) and 11(2).
- The legal position is clarified as under :
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– Under section 11(1)( a), a trust claiming exemption is allowed to accumulate 25 per cent of its income or Rs. 10,000, whichever is higher. Thus, if a trust accumulates a larger income than the limits prescribed for exemption, what would be chargeable to tax is the excess over the exempted limit, and not the entire accumulation including the exempted portion.
– Section 11(2), however, provides that if the conditions laid down in the sub-section are satisfied, restrictions as regards accumulation or setting apart of income shall not apply for the period during which the conditions prescribed therein remain satisfied. To avoid taxation under section 11(1)(a), investment in Government securities as prescribed in section 11(2), has to be made, not only in respect of excess amount which is chargeable under section 11(1)(a) but of the entire unspent balance including the exempted portion.
– Subsequently, if it is found that the provisions of section 11(2) have been violated and the income has been applied to purposes other than charitable or religious, or the amounts cease to be accumulated or set apart, the entire accumulation covered by section 11(2) will be subjected to tax under section 11(3).
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- Thus, while under section 11(1)(a), the tax will be levied in the year to which the income relates, under section 11(3) the income would be chargeable in the year in which the amounts cease to be accumulated for the specific purpose mentioned. Thus, when the amounts are taxed under section 11(3), the benefit which would have been available to a trust in respect of 25 per cent of its income or Rs. 10,000 under section 11(1)(a ) would also be lost.
8.2 Therefore, in view of the express language of the Circular referred to above, the intention of the Act is quite clear that when the unapplied amount is deemed to be the income of the assessee under section 11(3) of the Act, then the benefit of section 11(1)(a) of the Act would be lost. We observe that the above rulings on which reliance has been placed by the counsel for the assessee did not consider the above Circular i.e. the above Circular was not brought to the notice of the Court/ITA T for their consideration. Accordingly, we are unable to place reliance on the judicial precedents relied upon the counsel for the assessee on this issue. If the Natwarlal Chowdhury cited supra judgment is to be followed, it will result in undue benefit to the trusts and will defeat the legislative intent of section 11.
8.3 Secondly, in our considered view, there is a specific reason why this Circular was introduced and the purpose of introduction of the same is that the assessee should not be eligible to claim double deduction in respect of the same income i.e. recycle the same income, which remained unapplied after the end of the fifth year. Therefore, if exemption under section 11(1)(a)is allowable in respect of the deemed income under section 11(3), then exemption under section 11(2) is also allowable in respect of such deemed income as sub-section (2) of section 11 refers to the income referred to in section 11(1)(a). It would be useful to reproduce sub-section (2) of section 11 of the Act, to better understand the issue:
“Income from property held for charitable or religious purposes.—(1)
** ** **
(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1)….”
8.4 If exemption under section 11(1)(a) and 11(2) are allowed in respect of the “deemed income” under section 11(3), then it will result in unintended benefits to the assessee. This can be better understood through the following example. If for instance, during the year under consideration, no fresh income has been received by a Charitable Trust and the entire income consists of “deemed income” u/s 11(3) of the Act, which remained unapplied at the end of the fifth year. For simplicity, let us take this income to be Rs. 1 lakh. Then, if we were to accept that such “deemed income” is eligible for deduction u/s 11(1)(a) and 11(2) of the Act in absence of any express embargo to the same under the Act, then the assessee can claim 15% deduction in respect of such “deemed income” under section 11(1)(a)(i.e. Rs. 15,000/- is exempt u/s 11(1)(a)) and for the remaining Rs. 85,000/- the assessee may either furnish a statement to AO stating the purpose for which it is being set apart under sub-section (a) to section 11(2) or may invest a part thereof under sub-section (b) to section 11(2) of the Act. Therefore, in the above example, the assessee may furnish a statement to AO in respect of a sum of Rs. 30,000/- giving the purpose why this amount has been set apart under sub-section (a) to section 11(2) and for the balance Rs. 50,000/-, the assessee may make investment thereof sub-section (b) to section 11(2) of the Act. Therefore, the entire amount of Rs. 1 lakhs would not be subject to tax, which was “deemed income” of the assessee u/s 11(3) of the Act. The assessee can then repeat the whole process again in respect of the income which remains unapplied at the end of fifth year and becomes “deemed income” of the assessee u/s 11(3) of the Act. Clearly, in our considered view, such a practise cannot be accepted and any reading of the provisions of law, which may perpetuate such a practise cannot be accepted by us as well.
8.5 Thirdly, the Mumbai ITAT in the case of Trustees, The B.N. Gamadia Parsi Hunnarshala [2002] 77 TTJ 274 held that exemption under section 11 is available only on ‘income’ within meaning of section and not on ‘deemed income’ and, therefore, an assessee cannot claim benefit or accumulation with respect to ‘deemed income”. The ITAT in the above case distinguished the decision of Natwarlal Chowdhury Charity Trustsupra with the following observations:
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- In the case of CIT v. Natwarlal Chowdhury (cited supra), the Hon ‘ble High Court, with due respect, has not analysed this section in the correct perspective. In our humble opinion the different expressions i.e., ‘income derived from property’ and ‘incomeç used by the legislation under sections 11 and 12 of the Act missed the attention of their Lordships or the impact of the difference in the expressions were not brought to their Lordships notice. In fact, a different view was expressed by the Hon ‘ble Calcutta High Court in (supra) in a later decision. Under these circumstances, and in the light of the decision of the Hon ‘ble Bombay High Court in the case of CIT v. Thane Elec. Supply Co. [1994] 206 ITR 727 (Bom.) at 738 we hold that the assessee is not entitled to the benefit of accumulation of deemed income which is taxable under section 11(3) of the Act.
8.6 Fourthly, our view is also supported by Form No. 3A of the Income-tax Rules, 1962. Clause No. 10 of Part I of Form No. 3A prescribes the “deemed income” under section 11(3) to be added to the income arrived at after claiming exemption under section 11(1)(a) and 11(2). The form does not allow the assessee to claim exemption under section 11(1)(a)and 11(2) in respect of deemed income under section 11(3).
8.7 In view of the above observations, we are of the considered view that the assessee Trust is not eligible to claim exemption under section 11(1)(a) and Section 11(2) of the Act in respect of “deemed income” under section 11(3) of the Act.
9. In the result, the appeal of the assessee is dismissed for assessment year 2016-17. Since common facts and issues for consideration are involved for both the years under consideration i.e. assessment year 2015-16 and assessment year 201 6-1 7, the appeal of the assessee is dismissed for assessment year 2016-1 7 as well, in light of the above observations.”
Respectfully following the aforesaid decision by Rajkot Bench, we are of the considered view that Ld. CIT(Appeals) has not erred in facts in law in holding that “deemed income” under Section 11(3) of the Act is not eligible for claim of exemption under Section 1 1(1)(a) and 11(2) of the Act.
8. In addition to the above, it is also necessary to deal with the contention of the Counsel for the assessee that there is no restriction under the provisions of Section 1 1(1)(a) and Section 11(2) of the Act, restricting the claim of exemption in respect of “deemed income” under Section 11(3) of the Act. In this case, it would be useful to place reliance on the observations of the Mumbai ITAT decision of in the case of Trustees, The B. N. Gamadia Parsi Hunnarshala (2002) 77 TTJ 274. The relevant extract of the ruling are reproduced for ready reference:-
“The intention of the legislature, as could be seen from section 11 is to allow a charitable trust to accumulate a portion of income derived from property and not other incomes. However, by virtue of section 12, voluntary contributions are deemed to be income from property and, therefore, Explanation (1) was added to section 11(1) which specified that in computing 25 per cent of the income which maybe accumulated, voluntary contributions should be taken into account as they are deemed to be part of the income. Thus, wherever the legislature intended to include deemed income as part of the income ‘derived from property’ it was spelt out clearly. However, section 11(3) uses the expression ‘income of such person’ in contradistinction to the words ‘income derived from property’ used in other sub-sections of ]]. Thus, it could not be said that deemed income under section ]](3) should be taken as part the income derived from property for the purposes of allowing the benefit of accumulation.
The matter might also be looked from another angle. The assessee would be allowed to accumulate income if there is real income. Something which is not in the possession of the assessee cannot be accumulated or utilised at a later date. Under section ]](3) the sum which is applied to the purposes other than the charitable or religious purposes would also be treated as deemed income of the assessee though the accumulated income is not available with the assessee because it was applied for the different purpose. Reverting to section ]]9(])(a) and ]](2), 25 per cent of the income can be accumulated or set apart for an application to some specified purposes in India which means such amount should be available with the assessee for application. In the case of deemed income where the amount is already spent by an assessee (for the purposes other than charitable purposes) it cannot be said that the assessee accumulates with an intention to apply it for a rightful purpose. Thus, even on the limited count the assessee cannot claim the benefit of accumulation because the accumulation is allowed only if the intention of the assessee is to apply the same for the specific purpose. Thus, assessee could not claim the benefit of accumulation with respect to the deemed income.”
9. Therefore, in this case the ITAT Mumbai has made a specific observation that wherever the intent of the Statute was to give exemption under Section 1 1(1)(a) and Section 11(2) of the Act to any income, the same was specifically included in the Statute. The ITAT Mumbai pointed out that the intention of the legislature as could be seen from the plain language of Section 11 was to allow a charitable trust to accumulate a portion of income “derived from property” and not “other sources”. By virtue of Section 12, voluntary contributions are deemed to be “income from property” and therefore, Explanation (1) was added to Section 11(1) of the Act which specified that in computing 25% of the income which may be accumulated, voluntary contributions should be taken into account as they are deemed to be part of the income. Therefore, wherever legislature intended to include “deemed income” as part of “derived from property”, the legislature inserted the same in the Act in clear and express words. Further, the Mumbai ITAT also observed that the exemption under Section 11(1) uses the expression “income derived from property” whereas Section 11(3) uses the term “income of such person”. Therefore, it cannot be inferred that “deemed income” under Section 11(3) of the Act should be automatically taken as part of “income derived from property” for the purpose of allowing the benefit of accumulation. Accordingly, in view of the observations of Mumbai ITAT, we are of the considered view that there is no ambiguity in the language of Section 11(1) of the Act so as to lead to the inference that “deemed income” under Section 11(3) should be eligible for benefit of exemption under Section 1 1(1)(a) and Section 11(2) of the Act. Looking at this provision form another angle, the assessee would be allowed to accumulate the income if there is “real income” which is in possession of the assessee. Therefore, something which is not in possession of the assessee cannot be accumulated or utilized at a later date. In the case of “deemed income” under Section 11(3) of the Act, where the amount is already spent by assessee for purposes other than charitable purposes, it cannot be said that the assessee accumulated such income with an intention to apply it for rightful purpose. Therefore, in view of the above observations we are of the considered view that “deemed income” under Section 11(3) of the Act is not eligible for claim of exemption under Section 1 1(1)(a) and Section 11(2) of the Act.
10. Another point which needs to be mentioned is that Sections 1 1(1)(a) and 11(2) of the Act, being “beneficial provisions” need to only specify the specific heads of income to which exemption under Section 1 1(1)(a) and Section 11(2) would be available, and cannot be expected to mention / specify all specific heads or sources of income to which benefit of Section 11 is “not” available i.e. it cannot list down all possible “exclusions”. As observed earlier, Section 11 extends benefit of exemption to only “incomes derived from property held under Trust”, and “deemed” income under Section 11(3) (which uses the expression “deemed to be income of such person”) does not, going even by the literary reading of the words, fall under such categorization. Therefore, in our considered view, benefit of exemption under Section 1 1(1)(a) and 11(2) of the Act is not available to “deemed income” under Section 11(3) of the Act, even as on literary reading of statutory provisions. Accordingly, the A.O. is directed to re-compute the exemption available to the assessee under Section 1 1(1)(a) and Section 11(2) of the Act by excluding “deemed income” under Section 11(3) of the Act.
11. In the result, the appeal of the assessee is dismissed.
12. Since identical issues are involved for both the assessment years e. A.Y. 2016-17 and A.Y. 2017-18, our observations for A.Y. 2016-17 would also apply to A.Y. 2017-18. Accordingly, the appeal of the assessee for A.Y. 2017-18 is also dismissed.
13. In the combined result, the appeal of the assessee is dismissed for A.Y. 2016-17 and A.Y. 2017-18.